In this paper we show that dual-class shares can be an answer to agency conflicts rather than a result of agency conflicts. When a firm issues voting shares to raise funds, an incumbent manager?s control rights are diluted. This increases the risk that an incumbent could lose control of the firm and therefore, could lose the associated benefits of control.
Thus, the incumbent may forgo positive NPV investments in an effort to maximize his expected wealth. Non-voting shares allow a firm to raise funds without diluting manager?s control rights; hence, it can alleviate the underinvestment problem. But non-voting shares facilitate entrenchment and therefore, reduces value-enhancing takeover activities. Also, non-voting shares dilute dividends per share. We obtain conditions under which the benefit of using non-voting shares, that is, higher firm value due to higher investment outweighs the entrenchment and dividend dilution costs. Others have shown that deviations from ?one share-one vote? can be optimal, but our study is the first to integrate the dualclass decision into the rich body of research on capital structure and underinvestment.
The stylized fact that grounds much of the recent literature on common ownership is the parallel increase in the profitability of oligopolistic industries and common ownership. Some have argued that the growth in common ownership has caused the...Read more
We survey law firms, firms and institutional investors to better understand their preferred method of intracorporate dispute resolution in Brazil. Consistent with a number of theories, we find that these organizations prefer arbitration to...Read more
A 1970 New York Times essay on corporate social responsibility by Milton Friedman is often said to have launched a shareholder-focused reorientation of managerial priorities in America’s public companies. The essay correspondingly is a primary...Read more
This paper critiques an assessment by Bebchuk and Tallarita (BT) of the relative merits of shareholder and stakeholder governance. BT’s paper argues that stakeholder governance is either nothing more than enlightened shareholder value, or it...Read more